Corporations

Question 1

a de jure corporation

Answer 1

a corporation in accordance with law

Question 2

de facto corporation

Answer 2

if all corporate laws have not been followed, a de facto corporation might result

Question 3

creation of a de jure corporation (three steps simplified)

Answer 3

(1) a person
(2) a paper
(3) an act

Question 4

person—incorporators

Answer 4

to form a corporation, we need one or more persons who undertake to form it, who are known as the incorporators

they must execute and deliver the articles of incorporation to the secretary of state

they do not need to be citizens of the state of incorporation (and can be a person or entity)

Question 5

articles of incorporation (the paper)

Answer 5

must include the name of the incorporation
the name and address of each incorporator
a registered agent and the street address of the registered office, which is in the state
information regarding the corporation’s stock

Question 6

Business Purposes under the MBCA

Answer 6

Under modern corporation statutes, a corporation is given the power to do all things necessary or convenient to effect its purposes

most modern statutes also provide that a corporation may be formed for any lawful purpose

combined, these provisions provide authority for a corporation to do almost anything that is rationally related to a business purpose

thus, unless an exam question restricts a corporation’s purposes, you should usually find corporate acts to be within the corporation’s powers

Question 7

ultra vires acts

Answer 7

activities beyond the scope of a corporation’s stated business purposes are said to be “ultra vires”

under the common law, ultra vires acts were generally unenforceable

under the MBCA, ultra vires acts generally are enforceable

Question 8

act

Answer 8

to complete formation of the corporation, the incorporators will have notarized articles delivered to the secretary of state and pay any required fees

corporate existence begins upon this filing by the state; the filing is conclusive proof of corporate existence

Question 9

organizational meeting

Answer 9

if the initial directors were named in the articles, the board of directors hold the organizational meeting

if they were not named in the articles, the incorporators hold the organizational meeting

the purpose of the meeting is to “complete the organization of the corporation,” which means (1) adopt initial bylaws and (2) appoint officers

Question 10

bylaws

Answer 10

bylaws are an internal document

bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law

Question 11

internal affairs doctrine

Answer 11

under the internal affairs doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation

Question 12

entity status

Answer 12

upon formation, the corporation has entity status, meaning it’s a legal person

Question 13

unaware of the failure to form a de jure corporation

Answer 13

two doctrines may still allow the incorporators to escape liability: (1) de facto corporation and (2) corporation by estoppel

one important characteristic of BOTH THESE DOCTRINES is that anyone asserting either doctrine must be unaware of the failure to form a de jure corporation

Question 14

de facto corporations (requirements)

Answer 14

there must be a relevant incorporation statute

the parties made a good faith, colorable attempt to comply (meaning the parties tried and came close to forming a corporation)

there must have been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation

limitation: remember that the de facto doctrine can be raised as a defense to personal liability only by a person who is unaware that there was no valid incorporation

Question 15

corporation by estoppel

Answer 15

under the common law doctrine of corporation by estoppel, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence

ONLY APPLIES IN CONTRACTS CASES

Question 16

status of the corporation by estoppel and de facto corporation doctrines

Answer 16

these doctrines have been abolished in many states (and you should note as much)

Question 17

promoter

Answer 17

a promoter is a person acting on behalf of the corporation not yet formed

before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation

Question 18

promoters’ relationships with each other

Answer 18

promoters are joint venturers (partners) who have a fiduciary relationship with each other

they breach that fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters

Question 19

promoters’ relationship with the corporation

Answer 19

a promoter’s fiduciary duty to the corporation is one of fair disclosure and good faith

Question 20

breach of fiduciary duty arising from promoters’ sales to the corporation

Answer 20

a promoter who profits by selling property to the corporation may be liable for his profit UNLESS all material facts of the transaction were disclosed

disclosure must be to ALL WHO ARE CONTEMPLATED to be part of the initial financing scheme

Question 21

corporation’s liability for contracts entered by promoters prior to incorporation

Answer 21

since the corporate entity does not exist prior to incorporation, it is NOT BOUND to contracts entered into by the promoter in the corporate name before incorporation

the corporation may become liable only if it expressly or impliedly adopts the promoter’s contract

Question 22

promoter’s liability

Answer 22

anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable for the obligations incurred

if a promoter enters into an agreement with a third party on behalf of a planned but unformed corporation, the promoter is PERSONALLY LIABLE on the contract

the promoter’s liability CONTINUES after the corporation is formed, even if the corporation adopts the contract and benefits from it

the promoter will be released from liability only if there’s been an express or implied novation (that is, an agreement among all three parties to release the promoter from liability and substitute the corporation for the promoter in the contract)

Question 23

T/F: If the agreement expressly relieves the promoter of liability, it will be treated as an OFFER to the corporation.

Answer 23

TRUE

Question 24

subscriptions

Answer 24

subscriptions are written offers to buy stock from a corporation

Question 25

preincorporation subscription

Answer 25

preincorporation subscriptions are IRREVOCABLE for six months, unless otherwise provided in the term of the subscription agreement or unless all subscribers consent to revocation

Question 26

postincorporation subscriptions

Answer 26

postincorporation subscriptions are revocable until accepted by the corporation

Question 27

consideration for the issuance of stock

Answer 27

stock (or an option to buy stock) may be issued for any tangible or intangible property or benefit to the corporation this includes services ALREADY PERFORMED for the corporation

Question 28

par

Answer 28

par means minimum issuance price

Question 29

watered stock

Answer 29

on the bar exam, if you're given par stock, watch for WATERED stock, which can occur when par value stock is issued for less than its par value C Corp. issues 10,000 shares of $3 par to X for $22,000. Who is liable? The directors (if they knowingly authorized the issuance) and X (who is charged with notice of the par value).

Question 30

traditional view—par

Answer 30

traditionally, stock could not be issued by a corporation for LESS than the stock's stated par value, and the consideration received for the par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares

Question 31

MBCA Approach—Board Determines Value

Answer 31

The MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate the board's valuable is CONCLUSIVE if made in good faith

Question 32

preemptive rights must be stated in the articles

Answer 32

shareholders do not have preemptive rights to purchase newly issued shares to maintain their proportional ownership interest unless the articles of incorporation provide the right so if the articles are silent on this issue, we do NOT have preemptive rights

Question 33

limitations on preemptive rights

Answer 33

even if the articles do provide a preemptive right, shareholders generally have no preemptive right in shares issued for consideration other than cash and within six months after incorporation

Question 34

election of directors

Answer 34

initial directors may be named in the articles if not, they are elected by the incorporators at the organizational meeting after that, the shareholders elect the directors (at the annual shareholders' meeting)

Question 35

removal of directors

Answer 35

shareholders can remove directors before their terms expire shareholders may generally remove a director with or without cause

Question 36

board meetings: notice for regular meetings

Answer 36

notice is not required

Question 37

board meetings: notice for special meetings

Answer 37

at least two days' written notice of date, time, and place the notice need not state the purpose

Question 38

directors and proxies

Answer 38

directors cannot give proxies or enter voting agreements for how they will vote as directors because directors owe the corporation non-delegable fiduciary duties

Question 39

failure to give notice for a special directors' meeting

Answer 39

failure to give required (two days') notice means that whatever happened at the meeting is void or voidable, unless the directors who were not notified waive the defect (in writing or by attending the meeting without objecting)

Question 40

quorum at board meetings

Answer 40

for any meeting of the board, we must have a quorum (a majority of all directors) without a quorum, the board cannot act

Question 41

action by unanimous written consent

Answer 41

remember that any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, without a formal meeting

Question 42

fiduciary duties of directors: the standard

Answer 42

a director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation she must also use the care that a person in like position would reasonably believe appropriate under the circumstances the duty of care and loyalty^^

Question 43

nonfeasance

Answer 43

nonfeasance occurs when a director basically does nothing we have a "lazy director" the director is only liable if his breach "caused" the loss to the corporation. it is difficult to show causation in nonfeasance cases

Question 44

misfeasance

Answer 44

misfeasance occurs when the board makes a decision that hurts the business causation is much more clear

Question 45

business judgment rule

Answer 45

a director is not liable for misfeasance if she meets the business judgment rule directors who meet the standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous the business judgment rule is a presumption that when the board took an action, it did its appropriate homework the burden is on the plaintiff to show that the board either did not do appropriate homework or did something very stupid the court will not second guess a business decision if it was made in good faith, was informed, and had a rational basis

Question 46

reliance on reports and other information

Answer 46

in discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements) prepared by those associated with an employed by the corporation

Question 47

duty of loyalty: burden

Answer 47

duty of loyalty cases are about conflicts of interest, and the burden in these cases is on the defendant

Question 48

business judgment rule and duty of loyalty

Answer 48

the business judgment rule does not apply

Question 49

conflicting transactions // "self dealing"

Answer 49

this is any transaction between the corporation and one of its directors or that directors close relative or another business of the director's

Question 50

upholding conflicting interest transactions

Answer 50

a conflicting interest transaction will not be enjoined, set aside, or give rise to an award for damages if: (1) it was approved by a majority (but at least two) of the disinterested directors after the director disclosed all material facts to the board or that they were known when the board approved the transactions; OR (2) it was approved by a majority of votes entitled to be cast by disinterested shareholders (notice of the shareholders' meeting must describe the transaction); OR (3) judged by the circumstances at the time the corporation entered into the transaction, it was FAIR to the corporation

Question 51

special quorum requirements for conflicting interest transaction approvals

Answer 51

for purposes of a vote on a conflicting interest transaction, at a director's meeting, a quorum is a majority (at least two) of disinterested directors

Question 52

T/F: Even if the self-dealing deal is approved by the appropriate group, some courts also require a showing of fairness

Answer 52

TRUE

Question 53

corporate opportunity doctrine

Answer 53

the directors' fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act

Question 54

corporate opportunity doctrine: what is a corporate opportunity?

Answer 54

a usurpation problem arises ONLY IF a director takes advantage of a business opportunity in which the corporation would have an INTEREST or EXPECTANCY

Question 55

loans to directors

Answer 55

a corporation can make a loan to a director if it is reasonably expected to benefit the corporation

Question 56

determining director liability: presumption of concurrence

Answer 56

a director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records an oral dissent, by itself, is not effective

Question 57

T/F: Shareholders hire and fire officers.

Answer 57

FALSE | They hire/fire directors, who hire/fire officers.

Question 58

categories of indemnification of directors, officers, and employees

Answer 58

(1) No indemnification; (2) Mandatory Indemnification; (3) Permissive Indemnification

Question 59

no indemnification

Answer 59

a corporation cannot indemnify a director who is (1) held liable to the corporation; or (2) held to have received an improper benefit

Question 60

mandatory indemnification

Answer 60

a corporation MUST indemnify a director or officer who WAS SUCCESSFUL in defending a proceeding on the merits or otherwise against the officer for director for reasonable expenses, including attorneys' fees, incurred in connection to the proceeding they are entitled to indemnification "to the extent" they win; but some states require the director to have won the whole case to be entitled to mandatory indemnification

Question 61

permissive indemnification

Answer 61

a corporation MAY indemnify a director for reasonable litigation expenses incurred in UNSUCCESSFULLY DEFENDING a suit brought against the director on account of the director's position if the director (1) acted in good faith; and (2) believed that her conduct was in the best interests of the corporation

Question 62

close corporations & shareholder management

Answer 62

shareholders can run the corporation directly in a close corporation the characteristics of a close corporation are that there are few shareholders and the stock is not publicly traded

Question 63

who owes the duties of care and loyalty to the corporation?

Answer 63

whoever MANAGES the corporation

Question 64

special fiduciary duty in close corporations

Answer 64

in many states, courts impose a fiduciary duty on shareholders owed to other shareholders in a close corporation

Question 65

can shareholders be held liable for corporate debts?

Answer 65

generally, no but a shareholder might be personally liable for what the corporation did if the court PIERCES THE CORPORATE VEIL, which can happen in close corporations ONLY

Question 66

piercing the corporate veil

Answer 66

to pierce the corporate veil and hold shareholders personally liable: (1) the shareholders must have abused the privilege of incorporating; and (2) fairness must require holding them liable sloppy administration is not enough

Question 67

alter ego—piercing the corporate veil

Answer 67

if the shareholders ignore corporate formalities such that the corporation may be considered the "alter ego" or a "mere instrumentality" of the shareholders OR ANOTHER CORPORATION, and some basic injustice results, a court might pierce the corporate veil these situations may arise where shareholders treat corporate assets as their own, commingle their money with corporate money, and so on

Question 68

undercapitalization—piercing the corporate veil

Answer 68

the corporate veil may be pierced where the corporation is inadequately capitalized, so at the time of formation, there is not enough unencumbered capital to reasonably cover prospective liabilities courts may be more willing to pierce the corporate veil for a tort victim than for a contract claimant

Question 69

shareholder derivative suit

Answer 69

if the shareholder believes the corporation has been wronged but the directors have not done anything to enforce its rights with respect to the wrong, the shareholder may be able to bring a shareholder derivative suit to enforce the corporation's rights could the corporation have brought this suit? if so, it's a derivative suit

Question 70

shareholder direct actions

Answer 70

a direct action may be brought for breach of a fiduciary duty owed to the shareholder by an officer or director any recovery is for the benefit of the individual shareholder

Question 71

requirements for derivative suits: standing

Answer 71

to commence and maintain a derivative proceeding, a shareholder must have been a shareholder AT THE TIME the claim arose or must have become a shareholder through transfer by operation of law from someone who did own the stock at the time the claim arose

Question 72

stock transfer by operation of law examples

Answer 72

getting stock through inheritance or divorce decree

Question 73

derivative suits: demand requirements

Answer 73

the shareholder must make a written demand on the corporation (usually, the board) to take suitable action in some states, this demand must ALWAYS be made, and the shareholder cannot sue until 90 days after making this demand, unless: (1) the shareholder has earlier been notified that the corporation has rejected the demand; or (2) irreparable injury to the corporation would result by waiting for the 90 days to pass other states say that shareholders are not required to make the demand if the demand would be futile (say, if the directors would be the defendants)

Question 74

derivative suits: requirements for joinder of the corporation

Answer 74

the corporation must be joined to the suit as a defendant even though the suit asserts the corporation's claim, since the corporation did not do so, it is joined as a defendant

Question 75

dismissal and settlement of derivative suits

Answer 75

the parties can settle or dismiss a derivative suit only with court approval (which looks to good faith, a reasonable inquiry, and the best interests of the corporation)

Question 76

authorized stock

Answer 76

the number of shares the corporation may issue (set in the articles)

Question 77

issued stock

Answer 77

the number of shares the corporation has sold

Question 78

outstanding stock

Answer 78

the shares the company issued but has not reacquired

Question 79

effect of the record date

Answer 79

shareholders of record on the record date may vote at the meeting the record date is fixed by the board of directors

Question 80

70-day rule for record dates

Answer 80

the record date may not be more than 70 days before the shareholder meeting

Question 81

voting by proxy

Answer 81

a proxy is (1) a writing; (2) signed by the record shareholder; (3) directed to the secretary of the corporation; and (4) authorizing another to vote the shares

Question 82

revocation of proxy

Answer 82

a proxy is generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote themselves, in writing to the corporate secretary, or by subsequent appointment of another proxy

Question 83

irrevocable proxies

Answer 83

a proxy will be irrevocable only if it sates that it is irrevocable and is coupled with an interest or given as security

Question 84

voting trust

Answer 84

a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement in some states, the trust is not valid for more than 10 years unless extended it must be filed with the corporation

Question 85

voting agreement

Answer 85

rather than creating a trust, the shareholders can enter a voting or pooling agreement providing for how they'll vote their shares the requirements are that the agreement be in writing and signed it need not be filed with the corporation and is not subject to a time limit

Question 86

special shareholder meetings: who may call them

Answer 86

(1) board of directors; (2) the president; (3) the holders of at least 10% of the outstanding shares

Question 87

shareholder meetings: notice requirement

Answer 87

shareholders must be notified of meetings not fewer than 10 or more than 60 days before the meeting

Question 88

special shareholder meeting purpose requirement

Answer 88

for special meetings, the notice must state the purpose of the meeting the shareholders cannot do anything else at the meeting other than vote/act on the stated purpose

Question 89

quorum lost (special rule for shareholder meetings)

Answer 89

quorum is not lost if people leave the meeting

Question 90

voting requirement to elect a director

Answer 90

plurality

Question 91

voting requirement to approve a fundamental corporate change

Answer 91

traditional approach: majority of the shares entitled to vote modern approach: majority of shares that actually vote

Question 92

voting requirement to remove a director

Answer 92

traditional approach: a majority of the shares entitled to vote modern approach: the majority of shares that actually vote

Question 93

voting requirements for all other issues (other than election of a director, removal of a director, or a fundamental corporate change)

Answer 93

a majority of the shares that actually vote

Question 94

cumulative voting

Answer 94

ONLY relevant for close corporations; ONLY for election of directors; and ONLY exists if the articles permit it multiply the shareholder's number of voting shares times the number of directors to be elected

Question 95

enforcing a restriction on the transfer of stock agains the transferee

Answer 95

if the restriction is valid ("reasonable"), it can be enforced against the transferee if (1) the restriction is conspicuously noted on the stock certificate; or (2) the transferee had actual knowledge of the restriction at the time of the purchase

Question 96

the board's discretion & dividends or other distributions

Answer 96

a shareholder has a "right" to a dividend or other distribution only when the board declares it

Question 97

compelling distributions

Answer 97

the plaintiff must make a very strong showing of abuse of discretion

Question 98

liability for unlawful distributions

Answer 98

under the modern view, a corporation CANNOT make a distribution if it's insolvent or if the distribution would render it insolvent directors are jointly and severally liable for improper distributions a director who votes for or assents to a distribution that violates the above rule is PERSONALLY LIABLE to the corporation for the amount of the distribution that exceeds what could have been properly distributed but a director has a "good faith reliance" defense—it cannot be held liable for distributions approved in good faith

Question 99

liability for unlawful distributions (shareholders)

Answer 99

shareholders are personally liable only if they knew the distribution was improper when they received it

Question 100

procedure for fundamental corporate change

Answer 100

to do any fundamental corporate change, we need (1) board action adopting a resolution of fundamental change; (2) board submits the proposal to the shareholders with written notice; and (3) shareholder approval we also, for most fundamental changes, need to deliver a document to the secretary of state

Question 101

dissenting shareholder right of appraisal

Answer 101

the dissenting shareholder (to a fundamental corporate change) has a right of appraisal, meaning the shareholder may force the corporation to buy their stock for fair value ONLY applies to merger or consolidation; transferring substantially all assets; stock being acquired in share exchange; and converting to another form of business DOES NOT apply to dissolution

Question 102

when is there never an appraisal right?

Answer 102

even if the company is making a fundamental change other than dissolution, there is no appraisal right if the company's stock is listed on a national exchange (that is, it's a publicly traded corporation) or if the company has 2,000 or more shareholders and the shares involved have a value of at least $20 million the right of appraisal exists in CLOSE corporations

Question 103

perfecting a right of appraisal

Answer 103

before the shareholder's vote, the shareholder must file with the corporation a written notice of objection and intent to demand payment